What is a revocable living trust?

Even if a person sets up a living trust, it's recommended that he also create a will, according to Nolo. Any property that the trust holder obtains after creating his living trust may not be included on that trust before he dies. However, the unlisted property doesn't have to go through the probate process if it's listed on a will.  Anything that is not listed in a living trust or will goes to the deceased's closest relatives, notes Nolo. State law selects these relatives, and they may or may not be the people that the deceased intended to inherit his property.

There are four basic types of trust:
1. Revocable trusts
2. Irrevocable Trust
3. Inter vivos (living)
4. Testamentary (at death)

Creating a living trust is usually more financially sound than going through probate. Should the estate go through probate, the cost of the process is deducted from the estate, even if the will is uncontested. Living wills are also more likely to hold up better in court should they ever be contested.
A revocable living trust is an estate planning tool that is used to avoid probate and decide how a property is split up after the owner's death. It can be changed later by the person who set it up, as long as he is still mentally competent.

A revocable living trust functions in the same manner as a will, with a few additional benefits. However, it is more complicated and expensive than a will. The trust becomes irrevocable after the person who set it up passes away. A trustee is designated to oversee the trust and is the one to dole out the trust's assets to the beneficiaries after the person who set it up dies.

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What is an irrevocable living trust?

Irrevocable living trusts protect assets from taxes and creditors because the grantor no longer owns the assets once they are assigned to the trust, according to About.com. There are a number of types of irrevocable living trusts, reports Nolo. Bypass trusts transfer property to a trust when a first spouse dies, then the surviving spouse uses the property but does not own it. This allows the assets to bypass estate tax. Charitable lead trusts, charitable remainder trusts and pooled income trusts reduce estate and income taxes by designating a portion of the trust's income to be used by charity.
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Qualified terminal interest property irrevocable living trusts transfer a first spouse's assets to the surviving spouse and delay payment of estate tax until after the death of the second spouse, as reported by Nolo. Generation-skipping trusts reduce payment of estate taxes while passing assets on to children and grandchildren. Life insurance trusts pass ownership of life insurance policies on to a trust to avoid payment of estate tax. Special needs trusts allow for extra financial support for those with special needs, but because the beneficiary does not own the assets, they do not jeopardize government benefit payments.

what is a testamentary trust?

A testamentary trust is a trust contained in a last will and testament that provides for the distribution of all or part of an estate and often proceeds from a life insurance policy held on the person establishing the trust. There may be more than one testamentary trust per will.  Generally, testamentary trusts are created for young children, relatives with disabilities, or others who may inherit a large sum of money that enters the estate upon the testator's death.  A testamentary trust is provided for in a last will by the “settlor,” who appoints a “trustee” to manage the funds in the trust until the “beneficiary,” or person receiving the money, takes over.

The trust kicks in at the completion of the probate process after the death of the person who has created it for the benefit of his or her children or others; note this differs from “inter vivos” trusts, which are created during the lifetime of the settlor.  A testamentary trust lasts until it expires, which is provided for in its terms. Typical expiration dates may be when the beneficiary turns 25 years old, graduates from university, or gets married.

In choosing a trustee, the  person creating the trust may choose anyone, but it should be someone the person trusts to act in the best interests of the children or others receiving the trust funds. If, for any reason, the person chosen declines to take on the responsibility of trustee, someone else may volunteer or the court will appoint a trustee.  A testamentary trust makes most sense when the person's estate is small in comparison to the potential life insurance proceeds or other amounts that will be paid to the estate at death, a testamentary trust may be advisable.